The Chancellor’s budget has delivered some much-needed transparency for the business and entrepreneur communities, but with this clarity how do we expect them to react, and should we expect a sudden rush of entrepreneurs looking to sell their businesses?
In short, yes. Currently, subject to meeting certain criteria to qualify for Business Asset Disposal Relief (BADR), if you sell your business you pay 10% CGT on the gain. However, Rachel Reeves’ 30th October budget increased that rate with effect from April next year to 14% and then to 18% from April 2026. So, if you don’t qualify for BADR then your CGT liability rose with immediate effect, from 10% to 18% (for gains within your unused basic rate income tax band) and from 20% to 24% for higher rate taxpayers.
So, what do these numbers mean?
These are big numbers and it’s fair to anticipate that some entrepreneurs will seize upon this small window of opportunity between now and 5th April next year to sell. Who would not prefer to pay 10% rather than 14% or 18%? On a million-pound gain that would mean an extra £40,000 or £80,000 in tax.
You’ll notice a reference above to ‘some’ entrepreneurs, this is because a sale is usually a big decision, often planned out years in advance and there is little point in rushing a sale and almost inevitably getting a lower price which will wipe out any tax savings. But for all those thinking of selling within the next two or so years and maybe having made some initial plans already, then accelerating a sale by a year or so will look like an attractive option.
And recent history proves this point. In the run up to last week’s budget, the market saw a big increase in business sales. The same thing happened when a former CGT relief known as retirement relief was phased out from 1999.
What could this activity look like?
Business sales activity is now expected to increase by at least 50% and then tail off dramatically after April 2025 as entrepreneurs hold off selling in the hope of a change of government at the end of this parliamentary term, and/or the reintroduction of more generous CGT reliefs. It’s also expected that we will see an increase in entrepreneurs relocating abroad to one of the many jurisdictions where there is no CGT at all, as we have seen in the high-profile case of Charlie Mullins the Founder of Pimlico Plumber earlier this year.
Advice to sellers
If you are looking to sell, or in the process of selling, your business, before the CGT tax rate changes, the window is incredibly narrow but the key principles to any successful sale remain the same.
To maximise value, its vital to have all financial records up to date and accurate, and any outstanding legal issues resolved, such as compliance matters, intellectual property, and/or employee contracts. This will help streamline the process and help avoid any complications through the due diligence process.
Away from potential legal complications, having a clear business plan in relation to future market potential and a forecast for growth opportunities, as well as a plan for streamlining the organisation and for investment in greater efficiencies, will all help with a smoother transaction.
Overall picture
It is going to be a very busy few months for those in the legal profession specialising in mergers and acquisitions, and a bonanza for HMRC as CGT receipts soar in the short term. Despite this however receipts will most likely fall as the short window between the change in tax rates closes, meaning the government’s prediction of an increase by almost £1,500 million next tax year could simply be wrong.
For the business community this is a continuation of many very tough tax changes introduced by not just the new Labour government but also by the last Conservative one: the huge hike in corporation tax from 19% to 25%, slashing both the tax-free dividend allowance from £5,000 to £500 and the CGT allowance from £12,300 to £3,000 and increasing employer National Insurance rates. The whole thrust of government policy is anti-business and investment, so perhaps the most important statistic to look out for is the rate of business failure which could rise, resulting in job losses and fall in tax revenue.
It has never been easy to run a business (half fail within five years), and it is not getting any easier.
